The chemical industry has been on a fast growth trajectory in the past decade, resulting in increasing revenues
and growing profits. However, due to changing business environment, increasing competitive intensity and
need for increased focus on QSHE are raising costs and putting pressure on product margins and overall
profitability. Adding to these woes is increasing logistics and supply chain cost. Going forward supply
chain cost management will play a crucial role in addressing these challenges for chemical companies, say
Manish Panchal, Siddharth Paradkar and Sangeeta Misra of Tata Strategic Management Group.

The Indian chemical industry is
estimated to be the fifth largest
in the world and second largest in
Asia after China. The fact that the industry
contributes about 10 per cent of the output
of the Indian manufacturing sector, 13
per cent of IndiaĘs total exports and
9 per cent of the countryĘs total
imports underlines its criticality for the
national economy.

The chemical industry is very diverse with
close to one lakh products across a range
of categories. The end-use customer
segments are also diverse and have
varied requirements. Industry structure
ranges from highly fragmented in some
segments to highly consolidated in others.
Products exist in solid, liquid or gaseous
forms, with some being inflammable
and hazardous, and hence each product
comes with different handling, storage and
transportation needs.

The western coast of India has
been the key hub for chemicals and
petrochemicals industry accounting
for 60 per cent of trade. Gujarat and
Maharashtra alone account for ~65 per
cent of chemical and ~80 per cent of
petrochemical production in India. Since
production clusters are concentrated
in one particular region, better
infrastructure and logistics are required
to supply chemical products across the
country. The lengthening of supply lines
makes the distribution of chemicals more
transport intensive.

The involvement of a large number of
stakeholders (shipping lines, transport
agencies, environmental agencies,
etc.) in the transportation of chemical
products further increases the logistics
and supply chain complexity of the
chemicals industry.

Given the complexity of the industry and
nature of chemical products, the challenges
in chemical logistics are myriad. It has
been observed that the logistics burden
of all chemical product segments in India
has been growing at a faster rate than the
sales. As seen in the chart (see figure 1 on
next page), logistics cost as a percentage
of sales has increased by 8 per cent in the
past 4 years.

The inventory levels as a percentage of
sales have also increased by 7.5 per cent
in the same period, which will further add
to the supply chain costs for chemical
companies. Apart from the direct elements
of transportation, warehousing and
handling, many other indirect elements
contribute towards the overall cost burden
including packaging, inventory, inventory
holding costs and spend on QHSE.

Respite for the chemical industry from
rising logistics cost burden is not expected
in the near future.

Factors Expected to Inflate Future
Supply Chain Costs for Chemical
Industry in IndiaLogistics spend in India is around 13 per
cent of its GDP, which is high as compared
to developed countries (7-8%) due to
inadequate infrastructure and inefficiency.
In the future, there is high probability for
the cost to further escalate, driven by the
following factors:

Challenges in Inventory Planning: Due
to uncertain transit times and volatile
markets, companies carry excess safety
stock in order to avoid losing sales due
to stock-outs.

Also, in the chemical and petrochemical
industry, co- and by-products are common,
which often lead to a complex and sometimes
cyclic flow of materials. The diversity of
product segments and Stock Keeping Units
(SKUs) makes inventory management very
challenging. Most chemical manufacturing
processes involve continuous production,
requiring assets to be run at steady levels
of production, which makes it difficult to
implement lean solutions.

Expansion of Chemical Industry: As the
chemical industry is expanding across the
country, complexity of supply chain and
logistics will increase. New routes and
locations for transportation will be added
to the existing network. Each new link will
bring its own local complexities regarding
the availability of logistics assets, local laws and regulations, and infrastructure,
further compounding the logistics cost
burden on chemical companies.

Increased Focus on QHSE: There is
increasing political and public pressure to
reduce industrial risks and accidents. End
consumers are also becoming more and
more quality conscious. Environmental
and sustainability concerns will gradually
push chemical companies to increase
spend on QSHE to meet customer
demands. Shift to greener transport
modes, adoption of safety standards/
culture and putting security procedures
in place will incur additional expenses for
companies. Adoption of green logistics
without incurring incremental costs will
be challenging.

Rising Fuel Prices: Diesel price has
increased by 26 per cent in the last
year which directly affects the cost
of transportation. The trend of rising
crude oil and natural gas prices will
have a two-fold impact on the chemical
industry with respect to fuel cost and
feedstock cost. (See figure 2 above)

Though rail freight rates have increased by
just 1 per cent in the last 3 years, with the
adoption of the dynamic Fuel Adjustment
Component (FAC), rail freight rates will
no longer remain insulated from hikes in
fuel and energy prices. Railway, which has been the preferred mode of transport
for bulk commodities accounting for ~50
per cent share in bulk transportation, will
get costlier.

The upward trend is expected to
continue in the coming years, which
will only add to the logistics cost for the
chemical industry.

Process Inefficiencies and Lack of
Infrastructure: Apart from rising fuel
prices, the transportation cost burden on
chemical companies in India is heightened
due to higher transit time and lower
turnaround of vehicles because of multiple
check-points. Bad road conditions, oversaturated
railway network, unsuitability
of rail wagons to carry different types of
cargo, port congestion, shortage of CFSs
and insufficient draft at ports to handle
large vessels are the major infrastructural
issues that Indian companies face in
logistics. Moreover, there is a shortage
of 3PLs specialized in transportation
of bulk liquids and gases, especially
hazardous materials.

Key Levers for Managing Supply Chain Given the above factors, the logistics
cost burden in the Indian chemical
industry is here to stay. The chemical
industry in India needs to focus on supply
chain as a key lever to manage their
business and develop solutions towards optimization of logistics costs to remain competitive in the
global marketplace.

A thorough analysis of global best practices in chemical logistics
and comparison with India suggests that the following levers
need to be managed for reducing logistics cost.

Replenishment Models: Differentiated Replenishment
models along with increased visibility and reverse/re-transfer
logistics is an imperative for the future. Traditional demand
planning and forecasting methods are not conducive to today’s
volatile environment. A small error in the process results in
magnifying the problem and saddling the distribution network
with high volume of inventory for some items and stock outs
for others.

Route Planning: Network and Route planning has to take into
account real time events like traffic and availability of equipment
and personnel for loading/ unloading, materials handling and
flexibility to switch between modes. The traditional view of
lowest cost model for transportation is long outdated. The actual
cost of the service is fairly insignificant in comparison to the
product values, cost of carrying the inventory and more so loss
of sales or opportunity. There is a need for a more dynamic
approach and having options to enable you to select the most
appropriate solution.

QHSE Norms: Adopting and complying with QHSE norms and
related asset development is going to become a necessity for the
industry as customer and consumer become more aware. While
it could involve a complete overhaul of operations, the benefits
far outweigh the cost. While today the number of incidents is far
and few, this is not by design. The collateral damage on account
of a mishap can be significant and far greater than the lifetime
cost of adopting good practices.

Technology and Skill Development: The logistics workforce
in India, predominantly operational front-line staff (drivers,
goods handlers and workers for loading/unloading) who are
minimally educated, lack knowledge of the hazards of the
products and the necessary skills for handling. There is a
need to undertake skill development initiatives at the lowest
levels and adopting latest technologies and IT systems.
Improper handling of chemical products will lead to wastage
and add to the handling costs. Training the manpower in these
aspects will lead to significant reduction in damages, delay
and cost.

GST Readiness: Implementation of GST would standardize
tax rates on a pan-India basis and lead to consolidation
of logistics and warehousing units at central locations.
A gradual changeover to a hub and spoke supply chain
model is expected. Chemical companies will then have to
determine their supply chain network on the basis of logistical
considerations rather than taxation. This could imply changes
like a shift towards larger vehicles for transportation. For
example, there could be a transition from road to rail as rail
is better suited and more economical for bulk volumes and
longer distances

.
Recent Experiences in Supply Chain ManagementMany companies in the sector have already recognized the
importance of supply chain and have initiated steps in addressing
the issues in the right earnest.

Case Study – Tata Strategic recently helped a leading
agrochemicals company in transformation of their supply
chain by redesigning their order fulfilment process through
a pull based replenishment model. The organisation was
facing challenges on account of increasing logistics cost and
inventory in the system coupled with frequent cases of stock
outs and non-availability of products leading to lost sales.
The existing warehouse network was redesigned to introduce
hubs and regional warehouse. The order and product flow
was modified to support the new system. This intervention
identified inventory reduction of ~10% of the total sales across
the supply chain.